Serbia to sell banks, telecoms, aims for 6% growth

BELGRADE (MarketWatch)- Riding a strategy of aggressive privatization, Serbia expects a 6% gross domestic product growth rate in 2006, finance minister Mladjan Dinkic told Dow Jones Newswires in an interview.

Serbia boasts dozens of valuable factories and state-owned companies despite a decade of sanctions and a bloody civil war. The sectors most attractive to foreign investors so far have been tobacco factories, cell phone operators and banks. Both Serbia and tiny Montenegro are members of the Yugoslav federation, but Montenegro has its own finance ministry and is preparing to vote on independence this spring.

Serbia faces big challenges, including taming high inflation and unemployment. It's still a developing country: its an annual gross domestic product is around EUR25 billion, and the economy is less than a tenth the size Belgium, which has a similar population. But the minister says its biggest problems are political, not economic. GDP growth was 7.2% in 2004 and 6.5% in 2005. The E.U., which has accepted neighboring Romania and Bulgaria, has refused to begin talks on Serbia's joining the 25-nation trading bloc until the government in Belgrade arrests General Ratko Mladic, who is wanted as a suspected war criminal for the massacre of Muslims in Bosnia in 1995. At EUR2,750, GDP per capita "is higher than in Romania and Bulgaria," Dinkic said. The minister said Serbia will be ready economically to join the E.U. by 2012, but he's not in a hurry.

"When a country joins the E.U., its wages go up, so we're happy to have several years to attract foreign companies with low wages," he said.

Privatization is key to his plans. The biggest interest from foreign companies has been in banks, Dinkic said. Hyper-inflation during the Milosevic era triggered a slowdown in banking.

"We became an economy where people put money under their pillow,"said Dinkic.

With peace and more stability, that is now changing. Serbs now have EUR2.3 billion in savings, and that figure is growing by EUR100 million a month, Dinkic said. Banks are issuing 30 times more loans than in 2001. Serbia now has 3.8 million credit cards.

Foreign banks have helped restore faith in credit. Serbia last year sold Jubanka to Greece's Alpha Bank (ALPHA.AT) for EUR152 million, and currently has three other banks on the table, including the biggest domestic player, Vojvodkanska.

An Austrian bank, Raiffeisen International Bank Holdins (RIBH.VI), is the market leader in Serbia. The premiums for former state-owned banks are rising, Dinkic said. He expects a 6-to-1 price-to-asset ratio.

The government has already sold off two tobacco factories, to Philip Morris, owned by Altria Group Inc. (MO), and British American Tobacco PLC (BTI). Japan Tobacco International (2914.TO) is paying EUR25 million for another factory.

Serbia attracted them by locking in low excise taxes until 2011, Dinkic said. Real taxes on cigarettes in Serbia are only 30% of cost. A pack of Marlboros costs only EUR1.25 in Belgrade, a quarter the rate in most Western European countries. Serbia is also selling off mobile-phone operator Mobtel. After seizing the company from tycoon and Milosevic ally Bogoljub Karic, and charging him with bribery and embezzlement, Serbia is set to float the company in April, Dinkic said.

The starting price will be EUR700 million. The government will receive 82%, and the rest will go to Austrian entrepreneur Martin Schlaff, who bought a stake last year.

"This will be a test" for Serbia's privatization process and the establishment of rule of law, Dinkic said. He praises the Austrian government and Austrian banks "for helping us do the deal".

After selling off banks, cell phone and cigarette companies, Serbia will privatize energy assets by autumn, including the national oil company, Dinkic said.

In 2007, Dinkic says, the government will unload an insurance company.

But not every state industry will bring in cash. Some factories, like the Zastra car complex, are inefficient and won't find buyers, Dinkic said. "No company will take that for free."

The economy's biggest problem is inflation. Prices rose 13.7% in 2004 and 17.7% in 2005. Even though Dinkic forecasts inflation at under 10% in 2006, he acknowledges that "Serbia is in transition so prices of services are going up" from the deflated levels of the past.

Part of the problem is that there isn't enough competition in retail trade, he said.

Still the current inflation is a far cry from the early 1990s, when the government had to print bank notes worth 500 billion dinars. To keep prices under control and back the currency, the government will continue a strategy of aggressive spending cuts, Dinkic said.

Serbia ran a 1% surplus in 2005, down from a 4% deficit in 2004, thanks mostly to a new 18% value added tax, which now accounts for half of its revenue, or EUR2.5 billion. The debt has been cut to 44% from 170% five years ago.

As the government cuts costs and privatizes industries, Dinkic expects 19% unemployment to remain a problem. He argues the problem is normal for a country in transition.

"Flexibility of labor is very low," he explains. "People want one job for life." He defends closing down factories. "You can't force people to buy something they don't want."

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